Inflation Will Return As Oil Prices Stabilize, Economist Says

A Swiss economist predicted Tuesday that inflation in the United States would rise to a 5 to 7 percent rate over the next 3 or 4 years after the temporary benefits of falling oil prices wear off.

``The oil price decline is a one-time event,`` said Werner Rein, first vice president and chief economist of Union Bank of Switzerland, that nation`s largest bank.

``Its impact on inflation will only last for 1 to 1 1/2 years,`` he said in an interview. ``To have the same effect on inflation after that, we would need another 50 percent cut in oil prices next year. I doubt if oil will go to $6 a barrel.``

For 1986, Rein said he expects U.S. inflation to average about 3 1/2 percent, with prices edging up in the second half of the year as the economy picks up strength after a weak first six months.

``The long-term outlook has not changed,`` Rein said. He pointed out that the U.S. money supply has expanded at a fast rate in the last year. The recent drop in the dollar`s exchange rate will also lead eventually to higher prices, he said, affecting imported products initially and then domestic items.

Rein predicted the U.S. economy would grow about 4 percent this year, compared with 2.1 percent in 1985. But he said the economic outlook overseas was mixed. He projected growth of 3 1/2 to 4 percent in West Germany but said the Swiss and British economies would slow to between 2 and 2 1/2 percent growth.

Japan`s exports would be hurt by the 30 percent rise in the yen`s value against the dollar, he said, predicting the Japanese gross national product would slow to a growth rate of 2 1/2 percent from 4 1/2 percent in 1985.

The economist also saw the dollar following a ``horizontal long-term line, with a lot of fluctuations,`` over the next few years after its sharp drop since February, 1985. ``Short-term predictions are very risky,`` he said. Although President Reagan has ordered a study of exchange rates, Rein said he believes a return to fixed currency rates is ``highly unlikely.``

``You would need either a strong reference commmodity or currency,`` he said. ``The gold market has changed drastically in recent years. You would be giving control over inflation and economic policy to Moscow and South Africa, the largest gold producers.

``The West German mark and the dollar are the strongest currencies. But Germany`s economy is not large enough, and I doubt the other countries would want to give away their autonomy and tie their economies to the policies of the Federal Reserve Board.``

He warned that the mounting debts of Mexico and Brazil would continue to be a major source of worry to the international financial system, unless the two countries adopt stringent economic measures similar to those begun by Argentina.

A proposal by Treasury Secretary James Baker that U.S. banks lend Mexico and Brazil more money so they can pay their interest on existing debt

``creates the danger of sending the wrong signals,`` Rein said.

``There would be no incentive for them to go the Argentina way,`` he said, ``unless there is a clear statement that they don`t get any more money unless they really adjust their policies to clean up the existing mess.``

Rein said he suspected the Baker proposal was based partly on a fear that U.S. banks would be hit with large loan writeoffs if the debtor countries defaulted.

``Because of the relatively weak U.S. banking system, the trump cards are in the hands of the debtor nations,`` he said.